CHINA S ECONOMY AT A GLANCE

Transcription

1 CHINA S ECONOMY AT A GLANCE OCTOBER 217 CONTENTS Key points 2 Gross domestic product 3 Industrial Production 4 Investment 5 International trade - trade balance and imports International trade - exports 6 7 Retail sales and inflation 8 Credit conditions 9 CONTACT Gerard Burg, Senior Economist - Asia NAB Group Economics 1

2 KEY POINTS China s stable growth continued in Q3, but supported by another credit binge The 19 th National Congress of the Communist Party of China commenced in Beijing this week, a meeting that will shape the country s leadership for the next five years. As many as five of the seven member Politburo Standing Committee are set to retire, and their replacements may signal whether President Xi is likely to serve an additional five year term (beyond the current one ending in 222) and whether the stalled reform agenda can be brought back on track. The latest national accounts data showed that China s economy expanded by 6.8% yoy in the third quarter, compared with 6.9% in Q2. As was the case with Q2, economic growth in Q3 was supported with a large scale increase in credit. Reflecting the strength of economic growth across the first three quarters, we have revised our forecast for 217 to 6.8% (from 6.7% previously). Our forecasts for 218 and 219 are unchanged at 6.5% and 6.25% respectively. China s industrial production grew by 6.6% yoy in September accelerating from the comparatively weak 6.% recorded in August. Crude steel production rose in year-on-year terms in September (up by 5.3%) but has declined from recent peaks down to 71.8 million tonnes (from an all time high of 74.6 million tonnes in August). Fixed asset investment grew at a faster rate in September up by 5.7% yoy (compared with 4.9% in August) albeit this was still the second lowest rate of growth in 217. Given the acceleration in producer prices during September, this implies the second straight month of negative real investment at around -1.4% yoy (compared with -1.6% previously). New construction starts have slowed in recent months well off the peaks recorded in June. On a three month moving average basis, new residential starts rose by 4.7% yoy in September the slowest rate of growth this year, and well off the double digit levels of the first half. Similarly, house sales have softened. China s trade surplus narrowed further in September down to US$28.5 billion (compared with US$41. billion previously). Compared with the levels from August, there was a sharp increase in imports, while exports were marginally lower. Import volumes of key industrial commodities rose strongly with iron ore import volumes rising to record levels, a surprise given the planned shutdown of steel capacity in a range of northern cities across November to March. Retail sales growth was marginally stronger in September. In line with a slight softening in inflation trends, real retail sales growth was stronger back up to 9.3% yoy (compared with 8.9% in August). Consumer confidence has continued to improve albeit only modestly in August up to points (from points in July) the highest level in over two decades. China s monetary policy remained relatively stable across Q2 and Q3 following modest tightening in Q1. Over this period, the 7 day Shibor traded in a range of just 184 basis points broadly around 2.8%. The Shibor trended closer to 3.% immediately ahead of the Golden Week holidays (at the start of October) but has subsequently trended lower. 2

3 GROSS DOMESTIC PRODUCT REAL GDP EDGES SLIGHTLY DOWN TO 6.8% YOY IN Q3 China s stable growth trend continues % 16 The latest national accounts data showed that China s economy expanded by 6.8% yoy in the third quarter, compared with 6.9% in Q2. This was in line with market expectations in both the Bloomberg and Thomson Reuters surveys GDP growth (yoy) GDP growth (qoq, sa) Estimated by NAB prior to Dec 21 As was the case with Q2, economic growth in Q3 was supported with a large scale increase in credit with credit issuance increasing by 23% yoy, well above nominal economic growth. As a result, China s already high debt to GDP ratio has expanded further posing some longer term risks to the economy. It is worth noting the disconnect between headline annual growth measures and the NBS s seasonally adjusted quarterly growth rates which imply a slower rate of growth for Q3 at around 6.6%. Q1 25 Q1 27 Q1 29 Q1 211 Q1 213 Q1 215 Q1 217 Q1 219 ECONOMIC GROWTH BY INDUSTRY The gradual transition towards services continues Chinese economic growth by sector (% yoy) 2 16 Secondary industries Services remain the key driver of China s economic growth increasing by 8.% yoy (compared with 7.7% in Q2). In contrast the contribution from secondary industries declined growing by 6.1% yoy (from 6.4% previously). This continues to suggest that the gradual transition away from heavy industry towards consumption continues. Reflecting the strength of economic growth across the first three quarters, we have revised our forecast for 217 to 6.8% (from 6.7% previously). Our forecasts for 218 and 219 are unchanged at 6.5% and 6.25% respectively Tertiary (services) industries NAB GDP FORECASTS % GDP Q1 25 Q1 27 Q1 29 Q1 211 Q1 213 Q1 215 Q1 217 Source: Datastream, NAB Economics 3

4 INDUSTRIAL PRODUCTION INDUSTRIAL PRODUCTION Output accelerated in September up to 6.6% yoy % yoy (3mma) PMI SURVEYS DIVERGE IN SEPTEMBER Official measure rises to five year high Index 6 Industrial production (seasonally & CNY adjusted) Electricity output China s industrial production grew by 6.6% yoy in September accelerating from the comparatively weak 6.% recorded in August. This result was marginally ahead of expectations in the Bloomberg poll (6.5%) and well above the Thomson Reuters survey (6.2%). Crude steel production rose in year-on-year terms in September (up by 5.3%) but has declined from recent peaks down to 71.8 million tonnes (from an all time high of 74.6 million tonnes in August). Production of cement closely tied to the construction sector fell by 2.% yoy. Motor vehicle production recorded slightly weaker growth (3.1% yoy, compared with 4.7% in August), while electricity output rose by 5.3% yoy (up from 4.8% previously). Trends in China s major manufacturing surveys diverged in September. The official NBS PMI pushed higher to 52.4 points (from 51.7 points previously) the highest reading for the survey since April 212. In contrast, the Caixin Markit PMI pulled back, to 51. points (from 51.6 points previously). This may reflect the differing composition of these surveys with the NBS measure typically thought to have a higher share of large SOE firms. 55 NBS PMI 5 45 Caixin Markit PMI

5 INVESTMENT FIXED ASSET INVESTMENT Higher prices pushes real investment growth negative % yoy Fixed asset investment (nominal) Fixed asset investment (real) HOUSE PRICES AND CONSTRUCTION Housing sales and construction showing signs of slowing % yoy (3mma) 12 Residential construction 1 starts (LHS) New house prices (RHS) Residential sales (LHS) Source: CEIC, Datastream, NAB Economics Existing house prices (RHS) % yoy Fixed asset investment grew at a faster rate in September up by 5.7% yoy (compared with 4.9% in August) albeit this was still the second lowest rate of growth in 217. Given the acceleration in producer prices during September, this implies the second straight month of negative real investment at around -1.4% yoy (compared with -1.6% previously). The nominal increase was more evident among China s state-owned enterprises (SOEs) with investment increasing by 9.8% yoy (compared with 8.3% in August). In contrast, private investment only edged slightly higher up by 3.3% yoy (from 3.% previously). That said, on a three month moving average basis, SOE investment grew at its slowest rate since February 215. At an industry level, there continued to be divergent trends in investment. Real estate investment recorded a modest acceleration up to 7.3% yoy (on a 3 month moving average basis), compared with 6.8% previously. In contrast, manufacturing investment was much weaker at 2.2% yoy (3mma), from 3.6% in August. When combined, these two sectors accounted for 53% of total fixed asset investment in the first eight months of the year. New construction starts have slowed in recent months well off the peaks recorded in June however there was a noticeable increase month-onmonth in September (possibly in line with the uptick in investment). On a three month moving average basis, new residential starts rose by 4.7% yoy in September the slowest rate of growth this year, and well off the double digit levels of the first half. Similarly, house sales have softened. House price growth has continued to slow with new properties increasing by just.4% mom (3mma) in August, while existing properties rose by.3% mom with prices in China s largest cities contracting. It appears that the tightening in policy is gradually bringing property markets back into order but it is still too early to tell if this will significantly slow the construction boom a trend we have been anticipating for some time. 5

6 INTERNATIONAL TRADE TRADE BALANCE AND IMPORTS TRADE SURPLUS MUCH NARROWER IN SEPTEMBER Sharp increase in imports narrows the trade balance US$ billion (adjusted for new year effects) 25 China s trade surplus narrowed further in September down to US$28.5 billion (compared with US$41. billion previously). Compared with the levels from August, there was a sharp increase in imports, while exports were marginally lower Sources: CEIC, NAB Economics IMPORT VALUES AND VOLUMES Volumes accelerated in September including iron ore and coal % yoy (3mma) Exports Trade balance Chinese import values Imports China s imports totalled US$169.8 billion in September (compared with US$157.5 billion in August) an increase of 18.7% yoy. This level was the strongest result since December 214. Some of this increase reflects price effects with the RBA Index of Commodity Prices rising by 2% yoy however it appears that volumes rose strongly as well. Import volumes appear to have increased strongly in September with our estimate increasing by 11.7% yoy. On a three month moving average basis, volumes rose by 7.7% yoy in September, compared with 6.% in August. There was a significant ramp up in import volumes of some key commodities particularly iron ore and coal. Iron ore imports rose by 1.6% yoy to 12.8 million tonnes, an all time record. The strength of this increase was surprising given the planned shutdown of steel capacity in a range of northern cities across November to March, along with a slowing in steel output. Similarly, coal imports rose strongly up to 27.1 million tonnes an increase of 1.8% yoy and the highest level since December 214. Reports in September suggested that authorities were seeking to restrict coal imports to support domestic coal consumption meaning this may reflect stockpiling ahead of these changes. -2 Import volumes Other major commodity imports also rose strongly with copper volumes rising by 26% yoy and crude oil by 11.9% yoy

7 INTERNATIONAL TRADE EXPORTS CHINA S EXPORT VALUES AND NEW ORDERS Both export growth and confidence moved higher in September % yoy Index 6 Export values growth (LHS) Export values dipped marginally month-on-month in September, down to US$198.3 billion (from US$198.6 billion in August) although this still represented an increase of 8.1% yoy. The confidence of Chinese exporters was stronger in September with the new export orders measure of the NBS PMI survey back up to 51.3 points (having dipped down to 5.4 points previously) New export orders index (RHS) EXPORTS TO HONG KONG China s reported declines not evident in Hong Kong data % yoy (3mma) Chinese exports to Hong Kong China s data continues to show considerable differences in terms of exports by major market. Exports to the United States rose by 13.8% yoy, while exports to the European Union increased by 1.4% yoy. In contrast, exports to East Asian markets rose by just 4.1% yoy. Within the East Asian category, exports to Hong Kong fell by 5.7% yoy in September, while exports to non-hong Kong markets rose by 12.2% yoy, with Vietnam, South Korea, Taiwan and Malaysia accounting for the majority of this increase. We have regularly noted the sizeable disparity between Chinese and Hong Kong Customs trade data prior to 217 particularly between 212 and 216 and this continues to result in growth rates that distort the actual trade picture. In part this may reflect historical capital flows disguised as trade activity to avoid capital controls. For example, over the first eight months of 217, Hong Kong Customs data shows that imports from China rose by 5.5% yoy. In contrast, Chinese data suggests that exports to Hong Kong fell by 6.5% over the same period. -2 Hong Kong imports from China

8 RETAIL SALES AND INFLATION REAL RETAIL SALES EDGES BACK ABOVE 9% Consumer confidence at a new two decade high in August % yoy Index CONSUMER AND PRODUCER PRICES Food prices softer, producer prices ticked higher in September % yoy Consumer Prices Producer Prices % yoy 25 1 Food price index (LHS) 2 RBA Index of 8 15 Commodity Prices (RHS) Nominal Retail Sales (LHS) Real Retail Sales (LHS) Non-food price index (LHS) Source: CEIC, RBA, NAB Economics Consumer confidence (RHS) Producer price index (LHS) Retail sales growth was marginally stronger in September with nominal sales increasing by 1.3% yoy (compared with 1.1% previously). In line with a slight softening in inflation trends, the improvement in real retail sales was stronger back up to 9.3% yoy (compared with 8.9% in August). Consumer confidence has continued to improve albeit only modestly in August up to points (from points in July) the highest level in over two decades. China s headline inflation was weaker in September, with food price deflation returning (after the moderation of August). The Consumer Price Index rose by 1.6% yoy (down from 1.8% previously). Food prices in China have fallen for eight months in a row, with the index dropping by 1.4% yoy (compared with the.2% decline in August). This decrease was driven by falling prices for pork (down 12.4%), fresh fruit (down 3.%) and fresh vegetables (down 1.%). In contrast, non-food prices have continued to grow comparatively strongly with prices rising by 2.4% yoy (up from 2.3% in August and 2.% in July). Costs for healthcare and medical services rose by 7.6% yoy, vehicle fuel by 5.1% yoy and property related expenses by 2.8% yoy. Producer prices accelerated a little in September rising by 6.9% yoy (from 6.3% in August) even as trends in commodity markets (a key driver of producer price trends) softened. The RBA Index of Commodity Prices rose by 2% yoy (compared with 22% in August). Strong demand for heavy industrial products possibly demand brought forward due to the upcoming industrial shutdown over the November to March period could explain some of this uptick. 8

9 CREDIT CONDITIONS NEW CREDIT ISSUANCE Bank lending driving the growth in Chinese credit RMB trillion Total social finance Bank loans Trust & Entrusted loans Net corporate bonds Banker's acceptance bill Other 16.3% 19.9% 24.2% -94% -123% -18.5% Percentage change (yoy) Sources: CEIC, NAB Economics PBOC MAINTAINING STABLE MONETARY POLICY Shibor continuing to trend around 2.8% % Nine months to September 217 Standing Lending Facility rate Nine months to September 216 Excess reserve rate Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Start of Shibor corridor experiment Shanghai Interbank Offered Rate (7 day) China s credit issuance has continued to grow strongly with new credit rising by 23% yoy in Q3, compared with 36% in Q2. For the first three quarters of 217, credit issuance totalled RMB 15.7 trillion (an increase of 16.3% yoy). Bank loans have grown strongly accounting for almost three-quarters of new credit with tighter regulation of the shadow banking sector forcing some lending back through traditional channels. Bank loans totalled RMB 11.5 trillion in the first three quarters, an increase of 2% yoy. Non-bank lending increased by around 7.7% yoy over the same period, however trends differed considerably. Key parts of the shadow banking sector trust and entrusted loans rose by 24% yoy. Banker s acceptance bills have increased modestly this year with new issuance totalling RMB 466 billion but this was much stronger than the sharp contraction over the same period last year. In contrast, corporate bond issuance has been markedly weaker this year totalling just RMB 15 billion in the first nine months compared with around RMB 2.6 trillion for the same period in 216. China s monetary policy remained relatively stable across Q2 and Q3 following modest tightening in Q1. Over this period, the 7 day Shibor traded in a range of just 18.4 basis points just above 2.8%. The Shibor trended closer to 3.% immediately ahead of the Golden Week holidays (at the start of October) but has subsequently trended lower. The PBoC has stated that it is pursuing prudent and neutral monetary policy. Given efforts to address the sizeable corporate debt burden and the risk of capital flight, we argue that there is minimal downside risk to rates, and there may be an upside bias over the next year. At the end of September 217, the PBoC unexpectedly announced a cut to the Required Reserve Ratio the first since February 216. Rather than a loosening in monetary policy, this measure was designed to encourage lending to smaller firms (more details here). 9

10 Group Economics Alan Oster Group Chief Economist International Economics Tom Taylor Head of Economics, International Global Markets Research Peter Jolly Global Head of Research New Zealand Stephen Toplis Head of Research, NZ Jacqui Brand Personal Assistant Australian Economics and Commodities Riki Polygenis Head of Australian Economics +(61 3) James Glenn Senior Economist Australia +(61 4) Amy Li Economist Australia +(61 3) Phin Ziebell Economist Agribusiness +(61 4) Behavioural & Industry Economics Dean Pearson Head of Behavioural & Industry Economics +(61 3) Robert De Iure Senior Economist Behavioural & Industry Economics +(61 3) Brien McDonald Senior Economist Behavioural & Industry Economics +(61 3) Steven Wu Economist Behavioural & Industry Economics +(613) Tony Kelly Senior Economist International +(61 3) Gerard Burg Senior Economist Asia +(61 3) John Sharma Economist Sovereign Risk +(61 3) Australia Economics Ivan Colhoun Chief Economist, Markets David de Garis Director, Economics Tapas Strickland Economist FX Strategy Ray Attrill Head of FX Strategy Rodrigo Catril Currency Strategist Interest Rate Strategy Skye Masters Head of Interest Rate Strategy Alex Stanley Senior Interest Rate Strategist Credit Research Michael Bush Head of Credit Research Andrew Jones Credit Analyst Distribution Barbara Leong Research Production Manager Craig Ebert Senior Economist Doug Steel Markets Economist Jason Wong Currency Strategist Asia Christy Tan Head of Markets Strategy/Research, Asia, Julian Wee Senior Markets Strategist, Asia UK/Europe Gavin Friend Senior Markets Strategist Important Notice This document has been prepared by National Australia Bank Limited ABN AFSL ("NAB"). Any advice contained in this document has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this document, NAB recommends that you consider whether the advice is appropriate for your circumstances. NAB recommends that you obtain and consider the relevant Product Disclosure Statement or other disclosure document, before making any decision about a product including whether to acquire or to continue to hold it. Please click here to view our disclaimer and terms of use.